SBA Loan With Bad Credit: What You Can Expect

Loans secured by the Small Business Administration (SBA) are highly sought after, but getting approved with a bad credit score can be complicated. While there are more than 33 million small businesses in the United States, only 57,632 SBA 7(a) loans were approved in 2023.

Here are some things you can expect, and what you can do to raise your chances of approval.

Can you get an SBA loan with bad credit?

You may still be able to get approved for an SBA loan with bad credit, but it will depend on the lender. The Small Business Administration (SBA) doesn’t set a minimum credit score requirement, but individual lenders who offer SBA loans often do.

While it’s often more difficult to get approved for a loan with poor credit, it’s not impossible. Look for alternative lenders who match your needs and put more of an emphasis on things like annual revenue and time in business as opposed to the small business owner’s credit score.

What are the eligibility requirements to get approved for an SBA loan?

The 7(a) loan program is the SBA’s main small business loan program. To be eligible, you’ll typically need to meet certain criteria such as:

• Operating business. Your business must be operational to be eligible for this loan.
• For-profit. Non-profit organizations are not eligible.
• U.S.-based. Your business must be located in the United States.
• Size requirements. You must be considered a small business according to the SBA’s size standards.
• Business type. Businesses operating in certain industries may not be eligible.
• Credit access. Your business must show that it’s not able to obtain reasonable terms from non-government sources.
• Creditworthiness. You must demonstrate a reasonable ability to repay the loan.

How can I improve my chances of getting approved for an SBA loan with a low credit score?

There are a number of things you can do to demonstrate your creditworthiness to lenders beyond the number that pops up when they do a credit check. Here are a few ideas:

• Build your business credit score. Building your business’s credit can take some of the pressure off your personal credit score. Strong business credit will show lenders that your business is in good health and its finances are well managed.
• Create a business plan. A well-detailed business plan demonstrating your strategy for growth, market analysis and financial projections can make a positive impression on lenders.
• Increase annual revenue and cash flow. Increasing your annual revenue and maintaining a strong cash flow can indicate to lenders that your business has the funds to repay the loan.
• Pay off other debt. Decreasing your business debt obligations can free up cash and may make lenders more confident when deciding whether to approve your loan application.
• Time in business. Lenders will look at the amount of time you’ve been in business to help determine your stability.
• Collateral. Offering business assets as collateral can help you get approved and may get you lower interest rates and better terms.
• Explore alternatives. While SBA loans are highly sought after for their terms, there are other loan options for borrowers with a less-than-perfect credit history. Online lenders often have less strict requirements and may look more closely at things like revenue and time in business.

Why does my credit score matter?

Credit scores are a reflection of you or your business’s creditworthiness and indicate how likely you are to repay borrowed funds. It’s calculated based on your credit history, including factors such as payment history, amounts owed, length of credit history, new credit and types of credit used. Lenders use this score to assess risk and determine your ability to manage debt. A high credit score can help when borrowing in a few ways.

• Amount. Borrowers with good credit can typically receive a higher loan amount or larger credit limit.
• Repayment terms. A high credit score can help you get more favorable repayment terms and longer repayment periods.
• Annual percentage rate (APR). With good credit, you can typically get approved for loans with a lower APR.

What other business funding options are available for those with bad credit?

If you’re not able to secure an SBA loan through a traditional lender like a bank or credit union, it doesn’t mean you’re out of options. There are a lot of alternative business financing options that can provide your business with the working capital it needs. Alternative lenders often have more flexible requirements and offer funding solutions that can help.

Business term loan. A business term loan is a loan that provides a borrower with a lump sum of cash up front. This may be in the form of short-term loans repaid over the course of a few months or years, or longer-term loans of several years. They can be used for a variety of things like equipment financing, purchasing inventory or funding a large growth project.

Business line of credit. A business line of credit is a type of revolving credit. Borrowers will receive a credit limit that they can borrow up to. As the funds are repaid, they become available to borrow again. A business line of credit can be useful for covering cash flow gaps, covering ongoing business needs and staying prepared for opportunities as they arise.

Merchant cash advance or invoice factoring. Merchant cash advances and invoice factoring aren’t really loans. Instead, you’re selling a portion of your future revenue in exchange for cash in your business bank account now. Since these aren’t typical loans, the financial institution that provides the funds is often more interested in seeing healthy business financial statements than your credit report.

Business credit cards. Business credit cards operate in much the same way as a personal credit card, but since they’re typically opened under your business’s name they may be able to help you protect your personal credit. They can be useful for covering day-to-day business expenses.

Microloans. Microloans are a business loan option that are typically under $50,000. Because they offer a lower loan amount, they may be easier to qualify for. They can be a good option for small business owners who need to cover smaller expenses.

Crowdfunding. Crowdfunding is a way for businesses to raise capital without borrowing. Typically, individuals will contribute funds through an online platform to help a business grow. They’re often given early access or other benefits in exchange. This can be a useful option for startups who don’t meet the time-in-business requirements other types of financing often require.